Yet Canadian companies are struggling to balance sales-driven mindset with risk-focused culture
TORONTO, June 25, 2012 /CNW/ - Some 73% of Canadian executives have undertaken measures to reduce their liquidity risk since the 2008 economic crisis, Ernst & Young says.
Against a backdrop of global issues — continuing economic pressures in the US and Europe, the European sovereign debt crisis and a fast-changing regulatory environment — banks and insurance companies globally are reshaping their risk management processes and improving their methodologies to monitor compliance and test risk appetite.
"For the majority of global banks and insurance companies, increasing buffers of liquid assets and developing better risk-management processes, stress tests and methodologies are big priorities right now," says Paul Battista, Canadian Financial Services Advisory Leader at Ernst & Young. "The financial crisis really exposed these organizations' weaknesses and forced them to embed risk appetite into the core of their business. The challenge for these companies is to balance growth with a risk-focused culture."
According to Progress in financial services risk management, the third annual study on risk management conducted by Ernst & Young and the Institute of International Finance (IIF), balancing risk with growth is challenging, but organizations are learning to adhere to reformed models of risk appetite and have added new metrics to realistically assess and measure risk exposure.
Of the 69 global banks and six insurance companies surveyed, 77% are either in the process of or have finished in-depth reviews to identify and assess their business risks. According to respondents, revolving regulatory regimes such as Basel III and the Dodd-Frank Act will fundamentally change their company's business model.
Strides have also been taken to reform stress test models, methodologies and risk governance structures to really reshape the business and create a risk culture that the entire organization can adhere to. Findings show:
- Seventy-five percent of respondents have created and implemented new stress testing in the past 12 months.
- Fifty-eight percent have increased their attention to risk culture in the past 12 months, versus 23% in 2011.
- Eighty-seven percent of companies now have separate risk and audit committees, while shifting roles and responsibilities so that 58% of chief risk officers (CROs) report directly to the CEO and 90% have direct access to the board or risk committee.
While most firms are focused on changing their risk management structure, participants of the study agreed that there are many challenges to truly embedding a risk culture across the organization. Most significantly, 73% reported that inadequate systems and data to capture and report and measure information is a key issue, followed by 63% citing the difficulty of aligning the sales-driven business mindset with a risk-focused culture.
At a recent Risk and Return Canada conference, Battista added that several firms have reported changes to the composition of their boards and senior management teams; setting the tone from the top to visibly and consistently demonstrate a disciplined attention to risk and compliance, which in turn will help build a successful risk culture.
"One of the most important changes companies need to adhere to is the concept that risk is everyone's responsibility, not just the CRO's or the risk team's," says Battista. "Adapting a risk-focused culture by training and motivating employees to look beyond adherence to limits and consider the overarching risk complications is the most important step. Only then should the methodologies and processes follow."
About the study
Progress in financial services risk management is the third annual study on risk management conducted by the IIF and Ernst & Young since the 2008 crisis. From December 2011 through March 2012, 75 banks and insurance firms across 38 countries were interviewed either by phone, online or both. This resulted in 32 interviews with CROs, 12 interviews with other senior risk executives and 68 online survey responses.
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